Corporate Finance

Cover......Page 1
Title Page......Page 4
Copyright Page......Page 5
Detailed Contents......Page 6
PART 1 INTRODUCTION......Page 34
 Chapter 1 The Corporation......Page 35
   Sole Proprietorships......Page 36
   Partnerships......Page 37
   Corporations......Page 38
   Tax Implications for Corporate Entities......Page 39
   The Corporate Management Team......Page 40
    INTERVIEW with David Viniar......Page 41
   The Financial Manager......Page 42
   The Goal of the Firm......Page 43
   Ethics and Incentives within Corporations......Page 44
    Citizens United v. Federal Election Commission......Page 45
  1.3 The Stock Market......Page 47
   Traditional Trading Venues......Page 48
    INTERVIEW with Frank Hatheway......Page 49
   New Competition and Market Changes......Page 50
   Dark Pools......Page 51
  Key Terms......Page 52
  Problems......Page 53
 Chapter 2 Introduction to Financial Statement Analysis......Page 56
    International Financial Reporting Standards......Page 57
    INTERVIEW with Ruth Porat......Page 58
  2.2 The Balance Sheet......Page 59
   Assets......Page 60
   Liabilities......Page 61
   Market Value Versus Book Value......Page 62
  2.3 The Income Statement......Page 63
   Earnings Calculations......Page 64
  2.4 The Statement of Cash Flows......Page 65
   Operating Activity......Page 66
   Financing Activity......Page 67
   Statement of Stockholders’ Equity......Page 68
   Notes to the Financial Statements......Page 69
   Profitability Ratios......Page 70
   Liquidity Ratios......Page 71
   Working Capital Ratios......Page 72
   Interest Coverage Ratios......Page 73
   Leverage Ratios......Page 74
    COMMON MISTAKE Mismatched Ratios......Page 76
   Operating Returns......Page 77
   The DuPont Identity......Page 79
   WorldCom......Page 81
   Sarbanes-Oxley Act......Page 82
   Dodd-Frank Act......Page 83
  MyFinanceLab......Page 84
  Key Terms......Page 85
  Problems......Page 86
  Data Case......Page 93
 Chapter 3 Financial Decision Making and the Law of One Price......Page 94
   Analyzing Costs and Benefits......Page 95
   Using Market Prices to Determine Cash Values......Page 96
   The Interest Rate: An Exchange Rate Across Time......Page 98
   Net Present Value......Page 101
   The NPV Decision Rule......Page 102
   NPV and Cash Needs......Page 104
   Arbitrage......Page 105
   Valuing a Security with the Law of One Price......Page 106
   The NPV of Trading Securities and Firm Decision Making......Page 110
   Valuing a Portfolio......Page 111
    GLOBAL FINANCIAL CRISIS Liquidity and the Informational Role of Prices......Page 112
    Arbitrage in Markets......Page 113
   Where Do We Go from Here?......Page 114
  MyFinanceLab......Page 115
  Problems......Page 116
   Risky Versus Risk-Free Cash Flows......Page 120
   Arbitrage with Transactions Costs......Page 125
PART 2 TIME, MONEY, AND INTEREST RATES......Page 130
 Chapter 4 The Time Value of Money......Page 131
  4.1 The Timeline......Page 132
   Rule 1: Comparing and Combining Values......Page 133
   Rule 2: Moving Cash Flows Forward in Time......Page 134
   Rule 3: Moving Cash Flows Back in Time......Page 135
    Rule of 72......Page 136
   Applying the Rules of Time Travel......Page 137
  4.3 Valuing a Stream of Cash Flows......Page 139
  4.4 Calculating the Net Present Value......Page 142
   USING EXCEL Calculating Present Values in Excel......Page 143
   Perpetuities......Page 144
    Historical Examples of Perpetuities......Page 145
   Annuities......Page 147
   Growing Cash Flows......Page 150
  4.6 Using an Annuity Spreadsheet or Calculator......Page 155
  4.7 Non-Annual Cash Flows......Page 157
  4.8 Solving for the Cash Payments......Page 158
  4.9 The Internal Rate of Return......Page 161
   USING EXCEL Excel’s IRR Function......Page 164
  MyFinanceLab......Page 165
  Key Terms......Page 166
  Problems......Page 167
  Data Case......Page 173
  Appendix Solving for the Number of Periods......Page 174
 Chapter 5 Interest Rates......Page 176
   The Effective Annual Rate......Page 177
    COMMON MISTAKE Using the Wrong Discount Rate in the Annuity Formula......Page 178
   Annual Percentage Rates......Page 179
  5.2 Application: Discount Rates and Loans......Page 181
  5.3 The Determinants of Interest Rates......Page 182
   Inflation and Real Versus Nominal Rates......Page 183
   Investment and Interest Rate Policy......Page 184
   The Yield Curve and Discount Rates......Page 185
    COMMON MISTAKE Using the Annuity Formula When Discount Rates Vary by Maturity......Page 187
    INTERVIEW with Kevin M. Warsh......Page 189
  5.4 Risk and Taxes......Page 190
   Risk and Interest Rates......Page 191
   After-Tax Interest Rates......Page 192
  5.5 The Opportunity Cost of Capital......Page 193
   COMMON MISTAKE States Dig a $3 Trillion Hole by Discounting at the Wrong Rate......Page 194
  MyFinanceLab......Page 195
  Problems......Page 196
  Data Case......Page 201
   Continuously Arriving Cash Flows......Page 203
 Chapter 6 Valuing Bonds......Page 206
   Zero-Coupon Bonds......Page 207
    GLOBAL FINANCIAL CRISIS Negative Bond Yields......Page 209
   Coupon Bonds......Page 210
   Discounts and Premiums......Page 212
   Time and Bond Prices......Page 213
   Interest Rate Changes and Bond Prices......Page 215
    Clean and Dirty Prices for Coupon Bonds......Page 216
   Replicating a Coupon Bond......Page 218
   Valuing a Coupon Bond Using Zero-Coupon Yields......Page 219
   Coupon Bond Yields......Page 220
  6.4 Corporate Bonds......Page 221
    Are Treasuries Really Default-Free Securities?......Page 222
   Bond Ratings......Page 224
  6.5 Sovereign Bonds......Page 225
   GLOBAL FINANCIAL CRISIS The Credit Crisis and Bond Yields......Page 226
   GLOBAL FINANCIAL CRISIS European Sovereign Debt Yields: A Puzzle......Page 228
   INTERVIEW with Carmen M. Reinhart......Page 229
  MyFinanceLab......Page 230
  Key Terms......Page 231
  Problems......Page 232
  Data Case......Page 236
  Case Study......Page 237
   Computing Forward Rates......Page 239
   Computing Bond Yields from Forward Rates......Page 240
PART 3 VALUING PROJECTS AND FIRMS......Page 244
 Chapter 7 Investment Decision Rules......Page 245
   The NPV Profile and IRR......Page 246
   Alternative Rules Versus the NPV Rule......Page 247
    INTERVIEW with Dick Grannis......Page 248
   Pitfall #1: Delayed Investments......Page 249
   Pitfall #2: Multiple IRRs......Page 250
   Pitfall #3: Nonexistent IRR......Page 252
   Applying the Payback Rule......Page 253
   Payback Rule Pitfalls in Practice......Page 254
   NPV Rule and Mutually Exclusive Investments......Page 255
   IRR Rule and Mutually Exclusive Investments......Page 256
   The Incremental IRR......Page 257
    When Can Returns Be Compared?......Page 258
   Evaluating Projects with Different Resource Requirements......Page 260
   Profitability Index......Page 261
  MyFinanceLab......Page 263
  Problems......Page 264
  Data Case......Page 270
  Appendix Computing the NPV Profile Using Excel’s Data Table Function......Page 271
 Chapter 8 Fundamentals of Capital Budgeting......Page 272
   Revenue and Cost Estimates......Page 273
   Incremental Earnings Forecast......Page 274
   Indirect Effects on Incremental Earnings......Page 276
    COMMON MISTAKE The Opportunity Cost of an Idle Asset......Page 277
    COMMON MISTAKE The Sunk Cost Fallacy......Page 278
   Real-World Complexities......Page 279
   Calculating Free Cash Flow from Earnings......Page 280
   Calculating Free Cash Flow Directly......Page 282
   Calculating the NPV......Page 283
   USING EXCEL Capital Budgeting Using a Spreadsheet Program......Page 284
   Evaluating Manufacturing Alternatives......Page 285
   Comparing Free Cash Flows for Cisco’s Alternatives......Page 286
  8.4 Further Adjustments to Free Cash Flow......Page 287
   Break-Even Analysis......Page 291
   Sensitivity Analysis......Page 292
    INTERVIEW with David Holland......Page 294
   Scenario Analysis......Page 295
    USING EXCEL Project Analysis Using Excel......Page 296
  MyFinanceLab......Page 297
  Problems......Page 299
  Data Case......Page 306
  Appendix MACRS Depreciation......Page 308
 Chapter 9 Valuing Stocks......Page 310
   A One-Year Investor......Page 311
   Dividend Yields, Capital Gains, and Total Returns......Page 312
   The Mechanics of a Short Sale......Page 313
   A Multiyear Investor......Page 314
   Constant Dividend Growth......Page 315
   Dividends Versus Investment and Growth......Page 316
   John Burr Williams’ Theory of Investment Value......Page 317
   Changing Growth Rates......Page 319
   Share Repurchases and the Total Payout Model......Page 321
   The Discounted Free Cash Flow Model......Page 323
   Valuation Multiples......Page 327
   Limitations of Multiples......Page 329
   Comparison with Discounted Cash Flow Methods......Page 330
   Stock Valuation Techniques: The Final Word......Page 331
    INTERVIEW with Douglas Kehring......Page 332
   Information in Stock Prices......Page 333
   Competition and Efficient Markets......Page 334
   Lessons for Investors and Corporate Managers......Page 336
    Kenneth Cole Productions—What Happened?......Page 338
  MyFinanceLab......Page 339
  Further Reading......Page 341
  Problems......Page 342
  Data Case......Page 347
PART 4 RISK AND RETURN......Page 350
 Chapter 10 Capital Markets and the Pricing of Risk......Page 351
  10.1 Risk and Return: Insights from 89 Years of Investor History......Page 352
   Expected Return......Page 355
   Variance and Standard Deviation......Page 356
   Computing Historical Returns......Page 358
   Average Annual Returns......Page 360
   The Variance and Volatility of Returns......Page 362
   Estimation Error: Using Past Returns to Predict the Future......Page 363
  10.4 The Historical Trade-Off Between Risk and Return......Page 365
   The Returns of Large Portfolios......Page 366
   The Returns of Individual Stocks......Page 367
   Theft Versus Earthquake Insurance: An Example......Page 368
   The Role of Diversification......Page 369
  10.6 Diversification in Stock Portfolios......Page 370
   Firm-Specific Versus Systematic Risk......Page 371
   No Arbitrage and the Risk Premium......Page 372
    GLOBAL FINANCIAL CRISIS Diversification Benefits During Market Crashes......Page 374
    COMMON MISTAKE A Fallacy of Long-Run Diversification......Page 375
   Sensitivity to Systematic Risk: Beta......Page 376
    COMMON MISTAKE Beta Versus Volatility......Page 379
  MyFinanceLab......Page 381
  Problems......Page 383
  Data Case......Page 388
 Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model......Page 390
  11.1 The Expected Return of a Portfolio......Page 391
   Combining Risks......Page 392
   Determining Covariance and Correlation......Page 393
    COMMON MISTAKE Computing Variance, Covariance, and Correlation in Excel......Page 395
   Computing a Portfolio’s Variance and Volatility......Page 396
   Large Portfolio Variance......Page 398
   Diversification with an Equally Weighted Portfolio......Page 399
    INTERVIEW with John Powers......Page 401
  11.4 Risk Versus Return: Choosing an Efficient Portfolio......Page 402
   Efficient Portfolios with Two Stocks......Page 403
   The Effect of Correlation......Page 405
   Short Sales......Page 406
   Efficient Portfolios with Many Stocks......Page 407
    NOBEL PRIZES Harry Markowitz and James Tobin......Page 408
   Investing in Risk-Free Securities......Page 410
   Borrowing and Buying Stocks on Margin......Page 411
   Identifying the Tangent Portfolio......Page 412
   Portfolio Improvement: Beta and the Required Return......Page 414
   Expected Returns and the Efficient Portfolio......Page 416
   The CAPM Assumptions......Page 418
   Optimal Investing: The Capital Market Line......Page 419
   Market Risk and Beta......Page 420
    NOBEL PRIZE William Sharpe on the CAPM......Page 422
   Beta of a Portfolio......Page 423
  MyFinanceLab......Page 425
  Further Reading......Page 428
  Problems......Page 429
  Data Case......Page 435
   The Security Market Line with Differing Interest Rates......Page 437
 Chapter 12 Estimating the Cost of Capital......Page 440
  12.1 The Equity Cost of Capital......Page 441
   Market Indexes......Page 442
    Value-Weighted Portfolios and Rebalancing......Page 443
   The Market Risk Premium......Page 444
   Using Historical Returns......Page 446
   Identifying the Best-Fitting Line......Page 448
   Using Linear Regression......Page 449
   Debt Yields Versus Returns......Page 450
    COMMON MISTAKE Using the Debt Yield as Its Cost of Capital......Page 451
   Debt Betas......Page 452
   All-Equity Comparables......Page 453
   The Unlevered Cost of Capital......Page 454
   Industry Asset Betas......Page 456
   Differences in Project Risk......Page 458
   Financing and the Weighted Average Cost of Capital......Page 460
    INTERVIEW with Shelagh Glaser......Page 461
    COMMON MISTAKE Using a Single Cost of Capital in Multi-Divisional Firms......Page 462
  12.7 Final Thoughts on Using the CAPM......Page 463
  MyFinanceLab......Page 464
  Further Reading......Page 466
  Problems......Page 467
  Data Case......Page 471
   Beta Variation and Extrapolation......Page 472
   Outliers......Page 473
    COMMON MISTAKE Changing the Index to Improve the Fit......Page 474
    USING EXCEL Estimating Beta Using Excel......Page 475
   Other Considerations......Page 476
 Chapter 13 Investor Behavior and Capital Market Efficiency......Page 478
   Identifying a Stock’s Alpha......Page 479
   Profiting from Non-Zero Alpha Stocks......Page 480
   Informed Versus Uninformed Investors......Page 481
   Rational Expectations......Page 482
   Underdiversification and Portfolio Biases......Page 483
   Excessive Trading and Overconfidence......Page 484
   Hanging on to Losers and the Disposition Effect......Page 486
   Investor Attention, Mood, and Experience......Page 487
   Implications of Behavioral Biases......Page 488
   Trading on News or Recommendations......Page 489
   The Performance of Fund Managers......Page 491
   The Winners and Losers......Page 494
   Size Effects......Page 495
    INTERVIEW with Jonathan Clements......Page 497
   Momentum......Page 499
   Implications of Positive-Alpha Trading Strategies......Page 500
  13.7 Multifactor Models of Risk......Page 502
   Using Factor Portfolios......Page 503
   Selecting the Portfolios......Page 504
   The Cost of Capital with Fama-French-Carhart Factor Specification......Page 505
   Financial Managers......Page 507
   Investors......Page 508
  MyFinanceLab......Page 509
  Further Reading......Page 511
  Problems......Page 512
  Appendix Building a Multifactor Model......Page 518
PART 5 CAPITAL STRUCTURE......Page 520
 Chapter 14 Capital Structure in a Perfect Market......Page 521
   Financing a Firm with Equity......Page 522
   Financing a Firm with Debt and Equity......Page 523
   The Effect of Leverage on Risk and Return......Page 524
   Homemade Leverage......Page 526
    MM and the Real World......Page 527
   The Market Value Balance Sheet......Page 528
   Application: A Leveraged Recapitalization......Page 529
   Leverage and the Equity Cost of Capital......Page 531
   Capital Budgeting and the Weighted Average Cost of Capital......Page 532
   Levered and Unlevered Betas......Page 535
    NOBEL PRIZE Franco Modigliani and Merton Miller......Page 537
   Leverage and Earnings per Share......Page 538
    GLOBAL FINANCIAL CRISIS Bank Capital Regulation and the ROE Fallacy......Page 540
   Equity Issuances and Dilution......Page 541
  14.5 MM: Beyond the Propositions......Page 542
  MyFinanceLab......Page 543
  Further Reading......Page 544
  Problems......Page 545
  Data Case......Page 549
 Chapter 15 Debt and Taxes......Page 552
  15.1 The Interest Tax Deduction......Page 553
   The Interest Tax Shield and Firm Value......Page 555
   The Interest Tax Shield with Permanent Debt......Page 556
   The Weighted Average Cost of Capital with Taxes......Page 557
    The Repatriation Tax: Why Some Cash-Rich Firms Borrow......Page 558
   The Interest Tax Shield with a Target Debt-Equity Ratio......Page 559
   The Tax Benefit......Page 561
   No Arbitrage Pricing......Page 562
   Analyzing the Recap: The Market Value Balance Sheet......Page 563
   Including Personal Taxes in the Interest Tax Shield......Page 564
   Valuing the Interest Tax Shield with Personal Taxes......Page 567
    Cutting the Dividend Tax Rate......Page 568
   Do Firms Prefer Debt?......Page 569
   Limits to the Tax Benefit of Debt......Page 572
    INTERVIEW with Andrew Balson......Page 573
   Growth and Debt......Page 574
   The Low Leverage Puzzle......Page 575
  MyFinanceLab......Page 577
  Further Reading......Page 578
  Problems......Page 579
  Data Case......Page 583
 Chapter 16 Financial Distress, Managerial Incentives, and Information......Page 584
   Armin Industries: Leverage and the Risk of Default......Page 585
   Bankruptcy and Capital Structure......Page 586
  16.2 The Costs of Bankruptcy and Financial Distress......Page 587
   Direct Costs of Bankruptcy......Page 588
   Indirect Costs of Financial Distress......Page 589
    GLOBAL FINANCIAL CRISIS The Chrysler Prepack......Page 592
   Who Pays for Financial Distress Costs?......Page 593
   The Present Value of Financial Distress Costs......Page 595
   Optimal Leverage......Page 596
   Excessive Risk-Taking and Asset Substitution......Page 598
   Debt Overhang and Under-Investment......Page 599
    GLOBAL FINANCIAL CRISIS Bailouts, Distress Costs, and Debt Overhang......Page 600
   Agency Costs and the Value of Leverage......Page 601
   The Leverage Ratchet Effect......Page 602
    Why Do Firms Go Bankrupt?......Page 603
  16.6 Motivating Managers: The Agency Benefits of Leverage......Page 604
   Reduction of Wasteful Investment......Page 605
    Excessive Perks and Corporate Scandals......Page 606
    GLOBAL FINANCIAL CRISIS Moral Hazard, Government Bailouts, and the Appeal of Leverage......Page 607
  16.7 Agency Costs and the Trade-Off Theory......Page 608
   The Optimal Debt Level......Page 609
   Leverage as a Credible Signal......Page 610
   Issuing Equity and Adverse Selection......Page 612
   Implications for Equity Issuance......Page 614
   Implications for Capital Structure......Page 615
  16.9 Capital Structure: The Bottom Line......Page 618
  MyFinanceLab......Page 619
  Problems......Page 621
 Chapter 17 Payout Policy......Page 630
   Dividends......Page 631
   Share Repurchases......Page 633
   Alternative Policy 1: Pay Dividend with Excess Cash......Page 634
   Alternative Policy 2: Share Repurchase (No Dividend)......Page 635
   Alternative Policy 3: High Dividend (Equity Issue)......Page 637
   Modigliani-Miller and Dividend Policy Irrelevance......Page 638
  17.3 The Tax Disadvantage of Dividends......Page 639
   Taxes on Dividends and Capital Gains......Page 640
   Optimal Dividend Policy with Taxes......Page 641
   The Effective Dividend Tax Rate......Page 643
   Tax Differences Across Investors......Page 644
   Clientele Effects......Page 645
    INTERVIEW with John Connors......Page 646
  17.5 Payout Versus Retention of Cash......Page 648
   Retaining Cash with Perfect Capital Markets......Page 649
   Taxes and Cash Retention......Page 650
   Adjusting for Investor Taxes......Page 651
   Issuance and Distress Costs......Page 652
   Agency Costs of Retaining Cash......Page 653
   Dividend Smoothing......Page 655
   Dividend Signaling......Page 656
   Signaling and Share Repurchases......Page 657
   Stock Dividends and Splits......Page 659
   Spin-Offs......Page 661
    Berkshire Hathaway’s A & B Shares......Page 662
  MyFinanceLab......Page 663
  Key Terms......Page 664
  Problems......Page 665
  Data Case......Page 669
PART 6 ADVANCED VALUATION......Page 672
 Chapter 18 Capital Budgeting and Valuation with Leverage......Page 673
  18.1 Overview of Key Concepts......Page 674
  18.2 The Weighted Average Cost of Capital Method......Page 675
   INTERVIEW with Zane Rowe......Page 676
   Using the WACC to Value a Project......Page 677
   Summary of the WACC Method......Page 678
   Implementing a Constant Debt-Equity Ratio......Page 679
   The Unlevered Value of the Project......Page 681
   Valuing the Interest Tax Shield......Page 682
   Summary of the APV Method......Page 683
   Calculating the Free Cash Flow to Equity......Page 685
   Valuing Equity Cash Flows......Page 686
   Summary of the Flow-to-Equity Method......Page 687
  18.5 Project-Based Costs of Capital......Page 688
   Project Leverage and the Equity Cost of Capital......Page 689
    COMMON MISTAKE Re-Levering the WACC......Page 691
   Constant Interest Coverage Ratio......Page 693
   Predetermined Debt Levels......Page 694
   Issuance and Other Financing Costs......Page 696
   Security Mispricing......Page 697
   Financial Distress and Agency Costs......Page 698
  18.8 Advanced Topics in Capital Budgeting......Page 699
   Periodically Adjusted Debt......Page 700
   Leverage and the Cost of Capital......Page 702
   The WACC or FTE Method with Changing Leverage......Page 704
   Personal Taxes......Page 705
  MyFinanceLab......Page 707
  Further Reading......Page 709
  Problems......Page 710
  Data Case......Page 716
   Deriving the WACC Method......Page 718
   The Levered and Unlevered Cost of Capital......Page 719
   Solving for Leverage and Value Simultaneously......Page 720
   The Residual Income and Economic Value Added Valuation Methods......Page 722
 Chapter 19 Valuation and Financial Modeling: A Case Study......Page 724
  19.1 Valuation Using Comparables......Page 725
   Operational Improvements......Page 727
   Capital Expenditures: A Needed Expansion......Page 728
   Capital Structure Changes: Levering Up......Page 729
   Forecasting Earnings......Page 730
    INTERVIEW with Joseph L. Rice, III......Page 731
   Working Capital Requirements......Page 733
   Forecasting Free Cash Flow......Page 734
    USING EXCEL Summarizing Model Outputs......Page 736
   The Balance Sheet and Statement of Cash Flows (Optional)......Page 737
    USING EXCEL Auditing Your Financial Model......Page 739
   CAPM-Based Estimation......Page 740
   Ideko’s Unlevered Cost of Capital......Page 741
  19.5 Valuing the Investment......Page 742
   The Multiples Approach to Continuation Value......Page 743
   The Discounted Cash Flow Approach to Continuation Value......Page 744
   APV Valuation of Ideko’s Equity......Page 746
    COMMON MISTAKE Missing Assets or Liabilities......Page 747
   IRR and Cash Multiples......Page 748
  19.6 Sensitivity Analysis......Page 749
  MyFinanceLab......Page 750
  Further Reading......Page 751
  Problems......Page 752
  Appendix Compensating Management......Page 754
PART 7 OPTIONS......Page 756
 Chapter 20 Financial Options......Page 757
   Interpreting Stock Option Quotations......Page 758
   Options on Other Financial Securities......Page 760
   Long Position in an Option Contract......Page 761
   Short Position in an Option Contract......Page 762
   Profits for Holding an Option to Expiration......Page 764
   Returns for Holding an Option to Expiration......Page 765
   Combinations of Options......Page 766
  20.3 Put-Call Parity......Page 769
   Option Prices and the Exercise Date......Page 772
   Option Prices and Volatility......Page 773
   Non-Dividend-Paying Stocks......Page 774
   Dividend-Paying Stocks......Page 776
   Equity as a Call Option......Page 778
   Credit Default Swaps......Page 779
    GLOBAL FINANCIAL CRISIS Credit Default Swaps......Page 780
   Pricing Risky Debt......Page 781
   Agency Conflicts......Page 782
  MyFinanceLab......Page 783
  Problems......Page 784
  Data Case......Page 789
 Chapter 21 Option Valuation......Page 790
   A Two-State Single-Period Model......Page 791
   The Binomial Pricing Formula......Page 793
   A Multiperiod Model......Page 794
   Making the Model Realistic......Page 798
   The Black-Scholes Formula......Page 799
    INTERVIEW with Myron S. Scholes......Page 800
   Implied Volatility......Page 805
    GLOBAL FINANCIAL CRISIS The VIX Index......Page 806
   The Replicating Portfolio......Page 807
   Implications of the Risk-Neutral World......Page 809
   Risk-Neutral Probabilities and Option Pricing......Page 810
  21.4 Risk and Return of an Option......Page 812
   Beta of Risky Debt......Page 814
    COMMON MISTAKE Valuing Employee Stock Options......Page 817
   Agency Costs of Debt......Page 818
  MyFinanceLab......Page 819
  Problems......Page 821
 Chapter 22 Real Options......Page 826
  22.2 Decision Tree Analysis......Page 827
   Representing Uncertainty......Page 828
   Solving Decision Trees......Page 829
   An Investment Option......Page 830
    Why Are There Empty Lots in Built-Up Areas of Big Cities?......Page 833
   Factors Affecting the Timing of Investment......Page 834
   Investment Options and Firm Risk......Page 835
    GLOBAL FINANCIAL CRISIS Uncertainty, Investment, and the Option to Delay......Page 836
   Valuing Growth Potential......Page 837
   The Option to Expand......Page 839
    INTERVIEW with Scott Mathews......Page 840
   The Option to Abandon......Page 841
  22.5 Investments with Different Lives......Page 843
   Equivalent Annual Benefit Method......Page 844
  22.6 Optimally Staging Investments......Page 845
  22.7 Rules of Thumb......Page 848
   The Hurdle Rate Rule......Page 849
    The Option to Repay a Mortgage......Page 851
  MyFinanceLab......Page 852
  Problems......Page 854
PART 8 LONG-TERM FINANCING......Page 860
 Chapter 23 Raising Equity Capital......Page 861
   Sources of Funding......Page 862
    Crowdfunding: The Wave of the Future?......Page 863
    INTERVIEW with Kevin Laws......Page 864
   Venture Capital Investing......Page 867
    COMMON MISTAKE Misinterpreting Start-Up Valuations......Page 869
    From Launch to Liquidity......Page 871
   Advantages and Disadvantages of Going Public......Page 873
   Types of Offerings......Page 874
    Google’s IPO......Page 876
   Underpricing......Page 881
   Cyclicality......Page 884
   Cost of an IPO......Page 885
   Long-Run Underperformance......Page 886
   The Mechanics of an SEO......Page 887
   Price Reaction......Page 889
  MyFinanceLab......Page 890
  Key Terms......Page 891
  Further Reading......Page 892
  Problems......Page 893
  Data Case......Page 896
 Chapter 24 Debt Financing......Page 898
   Public Debt......Page 899
   Private Debt......Page 903
   Sovereign Debt......Page 904
    Detroit’s Art Museum at Risk......Page 906
    GLOBAL FINANCIAL CRISIS CDOs, Subprime Mortgages, and the Financial Crisis......Page 907
  24.3 Bond Covenants......Page 909
   Call Provisions......Page 910
    New York City Calls Its Municipal Bonds......Page 912
   Convertible Provisions......Page 914
  MyFinanceLab......Page 916
  Key Terms......Page 917
  Problems......Page 918
  Data Case......Page 919
 Chapter 25 Leasing......Page 922
   Examples of Lease Transactions......Page 923
   Lease Payments and Residual Values......Page 924
   Leases Versus Loans......Page 925
   End-of-Term Lease Options......Page 926
  25.2 Accounting, Tax, and Legal Consequences of Leasing......Page 928
   Lease Accounting......Page 929
    Operating Leases at Alaska Air Group......Page 930
   The Tax Treatment of Leases......Page 931
   Leases and Bankruptcy......Page 932
  25.3 The Leasing Decision......Page 933
   Cash Flows for a True Tax Lease......Page 934
   Lease Versus Buy (An Unfair Comparison)......Page 935
   Lease Versus Borrow (The Right Comparison)......Page 936
   Evaluating a True Tax Lease......Page 938
  25.4 Reasons for Leasing......Page 939
   Valid Arguments for Leasing......Page 940
    INTERVIEW with Mark Long......Page 942
   Suspect Arguments for Leasing......Page 943
  MyFinanceLab......Page 944
  Further Reading......Page 945
  Problems......Page 946
PART 9 SHORT-TERM FINANCING......Page 950
 Chapter 26 Working Capital Management......Page 951
   The Cash Cycle......Page 952
   Firm Value and Working Capital......Page 954
   Trade Credit and Market Frictions......Page 955
   Managing Float......Page 956
   Determining the Credit Policy......Page 957
   Monitoring Accounts Receivable......Page 958
   Determining Accounts Payable Days Outstanding......Page 960
  26.5 Inventory Management......Page 961
   Costs of Holding Inventory......Page 962
   Motivation for Holding Cash......Page 963
    Hoarding Cash......Page 964
  MyFinanceLab......Page 966
  Further Reading......Page 967
  Problems......Page 968
  Data Case......Page 971
 Chapter 27 Short-Term Financial Planning......Page 974
   Seasonalities......Page 975
   Negative Cash Flow Shocks......Page 978
   Positive Cash Flow Shocks......Page 979
   Temporary Working Capital......Page 980
   Financing Policy Choices......Page 981
   Line of Credit......Page 982
   Common Loan Stipulations and Fees......Page 983
  27.4 Short-Term Financing with Commercial Paper......Page 985
   GLOBAL FINANCIAL CRISIS Short-Term Financing in Fall 2008......Page 986
    A Seventeenth-Century Financing Solution......Page 987
   Inventory as Collateral......Page 988
    Loan Guarantees: The Ex-Im Bank Controversy......Page 989
  MyFinanceLab......Page 990
  Further Reading......Page 991
  Problems......Page 992
PART 10 SPECIAL TOPICS......Page 994
 Chapter 28 Mergers and Acquisitions......Page 995
   Merger Waves......Page 996
  28.2 Market Reaction to a Takeover......Page 998
  28.3 Reasons to Acquire......Page 999
   Expertise......Page 1000
   Efficiency Gains......Page 1001
   Tax Savings from Operating Losses......Page 1002
   Earnings Growth......Page 1003
   Managerial Motives to Merge......Page 1004
  28.4 Valuation and the Takeover Process......Page 1005
   Valuation......Page 1006
   The Offer......Page 1007
   Merger “Arbitrage”......Page 1008
   Tax and Accounting Issues......Page 1009
   Board and Shareholder Approval......Page 1010
   Poison Pills......Page 1011
   Staggered Boards......Page 1012
   White Knights......Page 1013
   Other Defensive Strategies......Page 1014
    Weyerhaeuser’s Hostile Bid for Willamette Industries......Page 1015
   The Free Rider Problem......Page 1016
   The Leveraged Buyout......Page 1017
    The Leveraged Buyout of RJR-Nabisco by KKR......Page 1018
   The Freezeout Merger......Page 1020
  MyFinanceLab......Page 1021
  Problems......Page 1023
 Chapter 29 Corporate Governance......Page 1026
  29.1 Corporate Governance and Agency Costs......Page 1027
   Board Independence......Page 1028
   Other Monitors......Page 1030
   Pay and Performance Sensitivity......Page 1031
   Direct Action by Shareholders......Page 1033
    Shareholder Activism at The New York Times......Page 1034
   Management Entrenchment......Page 1035
  29.5 Regulation......Page 1036
   The Sarbanes-Oxley Act......Page 1037
    INTERVIEW with Lawrence E. Harris......Page 1038
   The Cadbury Commission......Page 1039
   Insider Trading......Page 1040
   Protection of Shareholder Rights......Page 1041
   Controlling Owners and Pyramids......Page 1042
   The Stakeholder Model......Page 1044
  29.7 The Trade-Off of Corporate Governance......Page 1045
  MyFinanceLab......Page 1046
  Problems......Page 1048
 Chapter 30 Risk Management......Page 1050
   Insurance Pricing in a Perfect Market......Page 1051
   The Value of Insurance......Page 1053
   The Costs of Insurance......Page 1055
  30.2 Commodity Price Risk......Page 1057
   Hedging with Long-Term Contracts......Page 1058
   Hedging with Futures Contracts......Page 1060
    COMMON MISTAKE Hedging Risk......Page 1062
   Deciding to Hedge Commodity Price Risk......Page 1063
   Exchange Rate Fluctuations......Page 1064
   Hedging with Forward Contracts......Page 1065
   Cash-and-Carry and the Pricing of Currency Forwards......Page 1066
    GLOBAL FINANCIAL CRISIS Arbitrage in Currency Markets?......Page 1068
   Hedging with Options......Page 1070
   Interest Rate Risk Measurement: Duration......Page 1074
   Duration-Based Hedging......Page 1076
   Swap-Based Hedging......Page 1079
    The Savings and Loan Crisis......Page 1081
  MyFinanceLab......Page 1083
  Further Reading......Page 1085
  Problems......Page 1086
 Chapter 31 International Corporate Finance......Page 1092
  31.1 Internationally Integrated Capital Markets......Page 1093
  31.2 Valuation of Foreign Currency Cash Flows......Page 1094
   WACC Valuation Method in Domestic Currency......Page 1095
   Using the Law of One Price as a Robustness Check......Page 1097
  31.3 Valuation and International Taxation......Page 1098
   Multiple Foreign Projects and Deferral of Earnings Repatriation......Page 1099
   Differential Access to Markets......Page 1100
   Macro-Level Distortions......Page 1101
   Implications......Page 1102
  31.5 Capital Budgeting with Exchange Risk......Page 1103
   INTERVIEW with Bill Barrett......Page 1104
  MyFinanceLab......Page 1106
  Further Reading......Page 1107
  Problems......Page 1108
  Data Case......Page 1110
Glossary......Page 1112
 A......Page 1132
 B......Page 1134
 C......Page 1136
 D......Page 1140
 E......Page 1142
 F......Page 1145
 G......Page 1147
 I......Page 1148
 J......Page 1150
 L......Page 1151
 M......Page 1152
 N......Page 1154
 O......Page 1155
 P......Page 1156
 R......Page 1159
 S......Page 1161
 T......Page 1165
 U......Page 1166
 W......Page 1167
 Z......Page 1168